S&P 500 FUNDAMENTALFORECAST: BEARISH
- Volatility may be elevated in view of presidential debates and a pending US fiscal stimulus plan
- US presidential election, coronavirus resurgence, and rising US Dollar are among the key risks
- Recent selloff may prove to be another âhealthy correctionâ in the medium-term bull run
S&P 500 Index Outlook:
Since early September, US stock markets entered a consolidative phase, pausing a five-month rally that was mainly driven by recovery hopes and Fedâs balance sheet expansion. With the Fed members warning a lengthy recovery and lacking fiscal stimulus support, equity markets seem to have lost some steam. Unwinding activities were seen in risk assets, whereas safe-haven assets were on bid. The US Dollar Index (DXY) has climbed to a two-month high of 94.4.
Although the central bank has signalled no rate hikes until year 2023 in the latest FOMC meeting, a slowdown in the Fedâs balance sheet expansion and its reluctancy to ease more weighed on market sentiment (chart below).
S&P 500 Index vs. Fed Balance Sheet (2015-2020)
![SPX Balance sheet](https://a.c-dn.net/b/1cqvuV/SP-500-Price-Forecast-US-Presidential-Election-May-Spook-Volatility_body_Picture_6.png)
Some near-term headwinds include the US presidential election, a âsecond waveâ of coronavirus in parts of the EU, and a pending US fiscal stimulus package. The first Trump â Biden presidential debate will be held next week, September 29 from 9:00-10:00 P.M. ET. This debate may draw millions of viewers and market volatility may rise during the debate. The CBOT VIX term structure has likely priced-in higher volatility associated with options on the S&P 500 index leading up to the November election (chart below).
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Besides, credit risks are soaring among Chinaâs property developers, most of which are highly leveraged. Evergrande, one of Chinaâs largest real estate company, has warned of a possible debt restructuring if it doesnât get an IPO approval by end January. A failure by Evergrande to meet its debt obligations, if happens, will likely bring significant ripple effects to Asian bonds and stocks.
VIX Volatility Index Term Structureâ as at 09/24/2020
![VIX Term structure](https://a.c-dn.net/b/01yr0I/SP-500-Price-Forecast-US-Presidential-Election-May-Spook-Volatility_body_Picture_7.png)
Back to US markets, recent selloff in equities appeared more like a âhealthy correctionâ in a medium-term bull run, because there seems to be lack of systemic risk. The US economy is riding a slow but steady recovery from the Covid-19 pandemic. The unemployment rate has fallen to 8.4% in August from Marchâs high of 14.7%. Inflation - measured by US core CPI - has climbed to 1.7% in August from Aprilâs low of 1.2%.
The Fed have revised up this yearâs median US GDP growth forecast to -3.7% from Juneâs forecast of -6.5%. Meanwhile, the growth forecasts for year 2021 and 2022 have been slightly revised down to 4.0% and 3.0% respectively.
Economic projection of Fed Board members and Fed Bank presidents, Sep 2020
![Fed projections](https://a.c-dn.net/b/3420EX/SP-500-Price-Forecast-US-Presidential-Election-May-Spook-Volatility_body_Picture_8.png)
Source: federalreserve.gov
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--- Written by Margaret Yang, Strategist for DailyFX.com
To contact Margaret, use the Comments section below or @margaretyjy on Twitter